Tuesday, May 22, 2012

Monetary policy is like wine with dinner

Says Bloomberg's Kathleen Hays; when you've had too much it's too late to take it back. That observation is made (back in 2011) to Carnegie Mellon's Marvin Goodfriend after he lays out the three degrees of inflation path dependence and how they are all dangerous;

Dangerous, he says, because we learned from the high inflation 1970s that that is the route to higher unemployment too. That economists have no good idea how to lower the unemployment rate safely. He thinks it too easy to overdo the cure.

Then he is joined on the podcast by Columbia's Charlie Calomiris and Boston College's Peter Ireland. Calomiris first speaks of the institutional weakness of the Fed never talking about medium to long term inflation, which is what they can control, instead most of the talk is about short term results which they can't.

Ireland's contribution is an analogy about contracting to have your lawn mowed by one young man only to have his younger brother show up to do the actual job. Designed to show that monetary and fiscal policy aren't so neatly separated as textbooks teach.

At about 18 minutes in, the 800 lb gorilla appears in the Japanese garden; nominal GDP targeting as the focus of monetary policy. Calomiris is for it, but cautiously. He thinks it better than the 'fairly complicated' Taylor (interest rate) Rule for offering stable, long term growth.

Where Calomiris seems to differ with Market Monetarists (like Scott Sumner) is about 'level targeting'. Calomiris being a let bygones be bygones macro economist who thinks we can't return to the previous path, but can find our way from where we are now (at least in 2011), via NGDP targeting.